Defying Sanctions and Winning the Electric War
Here are four brief summaries of interesting background articles among the very many that have recently crossed my desk. Note that while the article by Timofeev illustrates the self-imposed injury of Britain in severing trade with Russia, Russia by far made up for this in a dramatic expansion in its trade with China and India.
Helmer on The Electric War (The Electric War)
Writing about the electric war in which Russia has engaged Ukraine, John Helmer (veteran Western correspondent based in Moscow) recently noted that although the Ukrainians were building Maginot and Siegfried lines according to the instructions of their foreign advisers, the offensive against Ukrainian electricity could not be stopped at these lines. Major Novorussian cities such as Odessa, Kharkov and Dniepropetrovsk are being blacked out and their populations forced to evacuate. Electricity surges threaten the plants and grids of southern Poland, Romania and Moldova. Power shut-downs affect NATO’s war supplies and even the flow of money. They will similarly impact the ability of French and Romanian troops in Moldava or Odessa to operate safely. Even if the power is switched back on, millions of electric appliances and fixtures will have been burned. Russia has also targeted petroleum and fuel oil storages that are necessary to power emergency generators (it has also, incidentally, bombed Europe’s most importrant gas storage facility, negatively impacting prices for gas across Europe). The westward extension of the missile and drone targeting has included Khmelnitsky, Rivne and Burshtyn, around the Galician capital of Lvov. Helmer reports that thermal power plants are being eliminated; dams also beginning to collapse from south to north; the Ukrainian military industry, he predicts, will be destroyed both by direct attacks and by the energy crisis. Typically, a first wave of Drone swarms identifies and activates air defence missile and artillery systems that protect electricity targets; a second wave of drones and missiles strike the main targets themselves.
Aris on Sanctions and Reform in Russia (Sanctions)
After two years of fighting, the Russian economy grew by 3.6% in 2023, making Russia the fastest growing of any of the G8 wealthy nations. This is in part the result of 12 National Projects launched in 2019, followed up by a National Projects 2.0 update for the recent presidential election.
The reform process had begun with the so-called May decrees signed by President Vladimir Putin in May 2012. These imposed a heavy social spending plan on Russia’s regions to improve the lives of the average Russian. In the face of the 2016 debt crisis, the Kremlin had sold off 19.5% of oil major Rosneft to Glencore and Qatar in a deal that Aris claims later transpired to be a bail out loan by Qatar’s sovereign wealth fund.
Putin’s response to issues of government corruption began with a deoffshorisation program in 2014 that banned government officials from holding offshore bank accounts or assets. This eventually resulted in a big reshuffle of the regional administration in 2016. The government tackled the the size of the shadow economy, reduced grey payments of wages, and radically overhauled the tax system, starting in 2018. In two years the government’s tax take increased by 20% while the tax burden only increased by 2%.
In the banking sector, when Elvia Nabiullina took over as governor of the Central Bank of Russia (CBR), she began closing three banks a week, imposing stricter regulation and reporting requirements on the survivors. In 2017, she closed some of the largest privately owned commercial banks in the sector that turned out to have been guilty of milking their pension fund assets to fuel side investments in things like real estate. The CBR cleaned out the state-owned banking deposit insurance agency (DIA), which was rife with corruption. All this left the banking sector healthier, more transparent, and well capitalised.
In 2016, Finance Minister Alexey Kudrin, set up the National Reserve Fund that is now the National Welfare Fund (NWF), with a view to providing a mechanism to cover budget deficits in difficult years, and successfully ring fence hundreds of billions of dollars from Duma deputies. Kudrin’s Plan K addressed social problems such as eradicating poverty and affordable housing.
The CBR began to accumulate large amounts of foreign exchange into a cash pile that would eventually reach $600bn and to pay down most of Russia’s external debt. This achieved a debt-to-GDP ratio of 12.4% in 2020, by far the lowest of any major economy in the world, but which was expected to rise to 18.1% in 2024 as a result of the war. Putin sanction-proofed the economy by building a Fiscal Fortress that was ready by 2021.
The Kremlin is currently updating the 12 National Projects. Putin has proposed extending budget planning from the current three years to six to improve the long-term planning of the state finances. The use of the so-called budget rule to siphon off excess oil and gas revenues to the National Welfare Fund (NWF) has been highly successful. In 2000, Putin had introduced flat income (13%) and corporate (24%) taxes, and is now edging towards requirements that the rich and big business carry a bigger share of the tax burden.
Putin has called for state and private companies to invest more in production of key goods, and that Russia should expand its production of things like consumer goods, pharmaceuticals, equipment, lathes and motor vehicles, as well as opening 100 new technology parks. To enhance the supply of capital for such projects, Putin is seeking to accelerate and simplify IPO for Russia’s high-tech companies and to double the capital market to 66% of GDP by 2030. He also wants to double public and private investment in research and development to 2% of GDP by 2030.
New residential construction expanded by 1.5 times in 2023, helped by a boost of subsidised mortgages that have led to a boom in construction. There is also a program to support families with lots of children and encourage higher birth rates. Another programme seeks to extend life expectancy in Russia to at least 78 years by 2030, and includes major health projects in such areas as cardiovascular and oncological diseases. Russia’s Youth project seeks nurture of the younger generation’s aspirations, successes and life values. A Human Resources project focuses on professional development, education, and training. A Data Economy project aims to integrate digital platforms across various social and economic sectors.
In some industrial areas, Aris reports that things like precision tools and electronics, Russia remains far behind other advanced economies and heavily dependent on imports.
Timofeev on UK anti-Russian Sanctions (Valdai Club) ((Valdai)
The British Government has published a new UK sanctions policy to contain Russia against the backdrop of the Ukrainian crisis. The sanctions are divided into financial, trade, transport and visa sanctions. Among the financial restrictions, blocking sanctions have become a key tool, implying the freezing of the assets of both individuals and legal entities, as well as a ban on transactions involving them in British jurisdiction.
“The entire range of existing sanctions is used against Russia. The Russian theme runs like a red thread through the Strategy. According to the figures cited in the document, the result of the application of sanctions has been a 94% drop in Russian imports and a 74% drop in exports. In other words, sanctions have practically paralysed bilateral trade, covering goods and services worth about 20 billion GBP in 2021 figures. Russian assets worth 22 billion pounds are blocked in British jurisdiction. This is significantly less than in the EU, where both private and sovereign Russian assets are blocked, but the value also seems significant”.
Russian experience also speaks of the failure of containment and demonstrations. Amendments to the 2019 Russia Sanctions Regulations began to be introduced on the eve of the Special Military Operation. However, they did not lead to the containment of the conflict; nor did demonstrations in the form of blocking and other sanctions at the beginning of the conflict and as it developed. Strictly speaking, the Strategy does not contain clear criteria for the effectiveness of sanctions. This, apparently, can be considered the amount of damage caused, but not a political result in the form of victory or defeat. In other words, sanctions are presented more as an instrument of causing damage, that is, an instrument of war, rather than an instrument for achieving political goals, or what could be called an instrument of diplomacy.
The Bell on Deoffshorization (Deoffshorization)
The Russian government is incentivizing economically significant offshore (ESO) Russian organizations back to Russia, allowing them the right to ditch any foreign holdings through which they hold assets. Selected companies on the list will have the ability to restrict the rights of foreigners, and withold certain information. Such companies must have over 75 billion rubles ($820 million), assets of more than 150 billion rubles, or more than 4,000 employees, and they must be more than 50% owned by Russian beneficiaries via holding companies registered in so-called “unfriendly” countries. Six such companies so far identified are Alfa Bank (whose shareholders include billionaire Mikhail Fridman), Alfastrakhovaniye, X5 Group, supermarket chain Azbuka Vkusa (41.1% owned by billionaire Roman Abramovich and his partners), fertilizer manufacturer Akron (owned by billionaire Vyacheslav Kantor) and mining company Razrez Arshanovsky. Tinkoff Bank, owned by Vladimir Potanin, Russia’s wealthiest man, wants to join. Two dozen other companies are reported to be interested, including agricultural company Rusagro, real estate company Cian, online marketplace Ozon, and online job portal HeadHunter.
The Russian government would be able to bring a case to the Moscow Arbitration Court to suspend the rights of the foreign owners in one of the selected companies. All shares of the Russian company would be transferred to the Russian entity, redistributed among the existing beneficiaries in proportion to their stake. Rights of foreign beneficiaries will be limited. Companies would be able to greatly reduce the amount of information about themselves they make public, making it more difficult for Western officials to apply sanctions. The trend of less transparency as a means of countering western sanctions is growing. The new measures will also make possible the resumption of dividend payments that have been suspended by sanctions.
According to recent statistics published by the Kyiv School of Economics, of the 3,756 foreign companies working in Russia before the full-scale invasion of Ukraine in 2022, only 372 have fully exited the Russian market. This is partly because companies that leave lose half the market value of their assets.